Associates must associate their value with firm success

Edward Poll, The Daily Record Newswire

In this age of the Millenial, junior attorneys sometimes get ahead of themselves by thinking they should get ahead in the firm fast and furiously.

But junior attorneys need to understand their monetary value to the firm and how their part as members of the team is integral to the success of the firm and, therefore, their personal success.

Despite being called partnerships (or LLCs or PCs), large law firms are generally governed by very few people in the organization (the management committee). As law firms become more corporate, dissemination of key financial benchmarks within the partnership (and among the firm's lawyers generally) tends to become more restricted.

That situation needs to change. All lawyers who are part of more than a solo practice should consider this list of key metrics and ask how many of them they know for their firm:

- gross revenues

- net revenues

- revenue per partner

- revenue per lawyer

- profits per partner

- number of new clients per year

- total number of matters now active

- new matters per year

- client retention and loss rates

- total billable hours

- cost of a billable hour

- billed hours

- realization rates

How many partners, even if they had access to all that data, would possess the business competency to calculate, or even understand, the traditional key measures of law firm performance: realization, utilization, leverage and expenses?

How many know, or understand, the firm's collection rate - or even their own personal one? And if partners are in such a position, why expect something different from the firm's associates, the potential partners of the future?

Various factors in a lawyer's performance affect the firm's efficiency and profitability:

- the lawyer's billable hours for the latest month and year to date;

- how many hours the firm billed out for the lawyer versus a markdown or write-off for some of the work (individually or as an average percentage applied to all associates);

- direct expenses for compensation (including bonus and benefits) for the lawyer and his direct clerical help, office space (cost per square foot of the real estate directly attributable to the lawyer and his direct help), etc.; and

- indirect expenses, or overhead (the percentage of revenue that the firm assigns on a per-attorney average to cover the cost for insurance, utilities, technology, etc.).

The result should determine an individual net profit value to the firm: Billings [associate's total compensation + direct and indirect expenses] = net profit.

Associates should realize that they cannot and will not remain with their firm unless it is profitable for the firm to keep them - if not for every month, then on an annualized basis. While the new, high-priced associates may not earn more than they cost the firm in the beginning, at some point that situation must change. In fact, large-firm managing partners agree that it takes, on average, from three to five years to break even on the investment in a new lawyer.

Associates, and indeed all of today's lawyers, need to be more sensitive to the financial needs and operation of the firm. The necessary conditions for that to happen are increased openness with financial information and better training in using that financial information.

Associates who learn to calculate their net worth and, based on that measurement, fulfill their responsibility to produce net profits, will prepare the firm for the business challenges of the future. By taking financial ownership of the firm's success as part of the team, the associate will assure his own success as an individual member of that team, too.

Whether or not lawyers are owners and employers in name, they can become so in behavior - and in that way, both firm and lawyer will reap the benefits. MLW

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Edward Poll is the principal of LawBiz Management. He coaches lawyers and is the creator of "Life After Law," a program that helps attorneys plan for profitable exits. He can be contacted at edpoll@lawbiz.com.

Published: Mon, Mar 16, 2015